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Here's What You Missed Out by Overlooking Micron (MU) Stock

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Micron Technology Inc. (MU - Free Report) has demonstrated impressive price performance over the last two years. In mid-2016, the stock was valued at around $13 and is currently trading close to $55 — marking a more than four-fold surge.

Year to date, Micron’s shares have returned approximately 32.7% compared with S&P 500 index’s and Nasdaq Composite’s rise of 2.1% and 9.5%, respectively.

The outperformance can be primarily attributed to Micron’s robust revenue and earnings growth, as well as expanding margins. We note that the company posted positive earnings surprise of 5.9% in the trailing four quarters.

We believe the company will continue its stellar growth performance in the quarters ahead. The optimism surrounding the stock comes from the fact that the DRAM market is still witnessing a huge demand-supply gap which is escalating prices.

Let’s discuss the factors which are responsible for this demand-supply mismatch.

Datacenters Demanding More DRAMs for Storage

The need for effective storage facility has been growing rapidly with the immense volume of data generated through smartphones and Internet-connected devices, along with the increasing adoption of artificial intelligence (AI) and cloud computing. Notably, AI-enabled servers require five to six times the capacity of regular DRAMs compared to standard cloud servers.

Moreover, self-driving vehicles need to make real-time decisions by analyzing large amounts of data, which necessitates the use of high-performance DRAMs. This is also likely to spur demand for DRAMs.

Market research firm International Data Corporation (IDC) forecasts that by 2025, the global datasphere will grow to 163 zettabytes (trillion gigabytes), which is 10 times the 16.1 zettabytes (ZB) of data generated in 2016. More importantly, almost 20% of this will be critical to daily lives and nearly 10% will be hypercritical.

Looking at the immense opportunity in data storage, data-center operators, such as Amazon (AMZN - Free Report) , Alphabet (GOOGL - Free Report) and Facebook (FB - Free Report) , have accelerated their server-deployment efforts to grab market share in the cloud-service space.

This has been driving demand for DRAM content. We believe this surge in demand will be conducive to Micron’s DRAM segment revenues in the quarters ahead.

Higher Capacity Smartphones Spur Demand

Over the past few quarters, demand from smartphone makers for higher capacity DRAM content has shot up. Smartphone makers, including Samsung, OnePlus, HTC and Xiaomi, have come up with higher memory phones comprising RAM of 6 GB or 8 GB.

As per data compiled by DRAMeXchange, smartphones recorded 33.4% growth in DRAM content in 2017, to an average of 3.2 GB per device. As smartphone original equipment manufacturers (OEMs) plan to roll out devices with higher capacity, demand for DRAM is likely to go up much faster, thereby benefiting Micron’s top and bottom-line results.

Bottom Line

As long as memory prices and demand continue to rise, Micron will continue to benefit. The ongoing investigation by the government of China on allegations that the company, along with Samsung and SK Hynix, indulged in fixing memory prices is unlikely to conclude any time soon. This lowers the possibility of any negative impact on demand and prices in the near term.

Keeping all these in mind, we believe investing in Micron will yield strong returns for investors. The stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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